We are into the fourth quarter of 2020, and the tanker market did not perform as expected by the consensus. The coronavirus has been used as a “black swan” event. While nobody forecasted a pandemic for 2020, it was possible to successfully position around the developments as they occurred. As I describe below, my real-time assessments and positioning showed how one could wildly profit this year.
In mid-January 2020, I wrote an article on Seeking Alpha titled, Contrarian Play On Shipping Names: Euronav. I had shorted Euronav (EURN) on January 14th. My thesis was:
Spot tanker rates surged in 4Q19 and remain elevated 1Q20, and the share prices of shipping names followed in lock-step, as speculators chased the market higher. But tanker rates and shipping names are highly volatile, and all of the favorable factors may have been priced in, while some temporary, supportive factors may have run their course.
Investors in shipping names have known that the Sulphur Cap regulation IMO 2020 has been coming for years. And the worldwide oil refining and shipping industries have been preparing. It’s fair to expect that the share prices of the shipping names reflect the market’s expectations of the IMO 2020 impact.
But IMO 2020 did not have the disruptive impact on the oil market that many had feared. And so the question becomes will IMO 2020 be a driver of higher values for shipping names in 2020, or is it now time to “sell the news”?
Tanker rates may have ended their run for this cycle, as the support from IMO 2020 may not be all that it was cracked up to be. In that case, the surge in shipping names’ share prices would suffer. EURN has full exposure to spot tanker rates and the reversal will dim the company’s earnings prospects. The play for 2020 appears more attractive from the short side to me.”
On January 30th, I published another article on Seeking Alpha, Time For A Short Play In Nordic American Tankers. My thesis was:
The share price of Nordic American Tankers (NAT) more than doubled following the September 25th imposition of sanctions on COSCO Shipping Corporation Ltd. (“COSCO”) by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) for their involvement in transporting Iranian oil. In my opinion, the sanctions will be lifted sometime this year. I therefore expect the NAT share price to drop back into the $2 per share range where it was prior to the sanctions.”
The surge in tanker rates in the 4Q19 is likely to be short-lived. Expectations for tailwinds from IMO 2020 going into effect January 1st and the first phase of the U.S.-China trade deal are being replaced by headwinds of an unexpected dent in virus-related petroleum demand and an oversupply of petroleum products. Therefore, I view NAT as a name that is likely to drop substantially in price in 2020.”
While the initial impact on the tanker market was negative due to the impact on oil demand, the pandemic also resulted in a collapse in oil prices. On March 25th, I closed my EURN and NAT short positions because the developing contango in oil futures prices was creating a demand for tankers to be used for floating storage and tanker rates had begun to respond. Share prices of EURN, and especially NAT, later surged.
Note: BRS is the tanker portfolio returns of Boslego Risk Services.
On May 11th, I wrote, Nordic American Tankers: An Attractive Short Play. My thesis was:
The spike in tanker rates due to demand for floating storage appears to have peaked. VLCC tanker rates fell by more than 50 percent in the week ending May 1st v. the prior week, according to Clarksons.
As the WTI spread has narrowed, the floating storage incentive will disappear, which will depress tanker charter rates. Longer term, oil demand destruction will likely remain, reducing oil flows and tanker demand. For these reasons, I expect the share price of NAT to drop.”
I shorted NAT on May 12th and have maintained my short through October 16th. My total tanker portfolio returns of 2020-to-date have been 78%. I compared my returns to long positions of three popular tanker names in 2020: Ardmore Shipping Corporation (ASC), Diamond S Shipping Inc. (DSSI), and Scorpio Tankers (STNG). The three returns to date on long positions in those names were -64%, -59% and -71%, respectively.
As of October 16th, the VLCC spot TCE earnings were $11,600/day, according to Poten & Partners, as compared to $60,200 for the year to date.
Looking forward, “US exports fell to a 14-month-low over the week ended Oct. 9, and are expected to remain weak into 2021, as sources note poor demand in the export market,” according to S&P Global Platts. “[There are] lots of boats hanging around with few takers was what ship brokers were saying [the] past three weeks now. Freight has been depressed since the end of May and remains so 15 days into Q4, when freight typically sees seasonal highs, but due to the pandemic and unwinding of floating storage barrels booked in Q2 2020, rates have not picked up.”
Longer-term, I expect the demand for tankers to drop with the demand for oil consumption. In summary, the tanker orderbook is at a 23-year low. In normal times, this would be supportive for future tanker rates. But the pandemic has changed the short- and long-term outlook for oil consumption and therefore tankers. In 2 of 3 scenarios by BP, it expects that oil demand has already peaked. Oil tanker names have suffered in 2020 and the longer-term outlook is dim.
My thesis is explained in detail in my article, “Tanker Market Outlook: Demand For Tankers To Drop With Oil Consumption.”
The general consensus in 2019 was the tanker market would benefit from IMO 2020. They figured that IMO2020 created Irving Fisher’s “permanently high plateau.” His reputation during his lifetime was irreparably harmed by his public statements, just prior to the Wall Street crash of 1929, claiming that the stock market had reached “a permanently high plateau.”
But tanker names began to plummet in early January, even before the pandemic began to impact oil demand and shipping. By the end of January, it became clear to me that the virus would affect oil demand.
In March, the demand for tankers for floating storage began spiking, and I closed my shorts. I re-shorted in mid-May when it became clear to me that the spike would end.
2020 has been a punishing year for the tanker sector. But by trading tanker names and not being locked into confirmation-biased beliefs, such as the IMO 2020 myth, it was possible to wildly outperform the sector.
To guide investors who are interested in profiting from outstanding opportunities in the energy sector, I provide a service on Seeking Alpha’s Marketplace oriented toward individual investors, Boslego Risk Services. A long/short Model portfolio is continuously updated, along with on-going analysis of the oil market.
I am now accepting new members to Boslego Risk Services and invite you to sign up. There are monthly and annual pricing options as described here. You may also read reviews posted by members here.
Disclosure: I am/we are short NAT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.